ATC211208: Report of the Select Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B21 - 2021] (National Assembly- section 77), dated 08 December 2021

NCOP Finance

Report of the Select Committee on Finance on the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B21 - 2021] (National Assembly- section 77), dated 08 December 2021

1.Introduction and background

Section 77 of the Constitution requires all money Bills to be considered in accordance with a procedure for passing revenue Bills established by the Money Bills Amendment Procedure and Related Matters Act, 2009 (Money Bills Act). Section 11 (1-3) of the Money Bills Act states that, in amending the revenue Bills, the Committee must ensure that the revenue raised is consistent with the fiscal framework; it considers equity, efficiency, certainty and ease of collection; the composition of tax revenues; regional and international tax trends and the impact on development, investment, employment and economic growth. Section 11 (4) further requires the Committee to hold public hearings on the revenue Bills and report to the House.

The Minister of Finance first introduced the draft version of the 2021 Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) during the February 2021 National Budget tabling. The Rates Bill was formally tabled in Parliament on 11 November 2021, together with the Medium Term Budget Policy Statement (MTBPS). The Bill gives effect to changes in rates and monetary thresholds to the personal income tax tables and increases of the excise duties on alcohol and tobacco.

On 30 November 2021, the National Council of Provinces (NCOP) formally referred the Rates Bill to the Select Committee of Finance (SeCoF), for consideration and reporting. On the same day, SeCoF received a briefing from National Treasury and the South African Revenue Service (SARS).

The Committee held virtual public hearings on 07 December 2021 and received submissions from the South African Tobacco Transformation Alliance (SATTA), Black Tobacco Farmers Association (BTFA) and British American Tobacco South Africa (BATSA).

2.Overview of the proposed amendments in the 2021 Rates Bill

The objective of the 2021 Rates Bill is to fix the rates of normal tax; to amend the Income Tax Act, 1962, so as to amend rates of tax and monetary amounts; to amend the Customs and Excise Act, 1964, so as to amend rates of duty in Schedule 1 to that Act; to insert new tariff items; to delete tariff items; to delete rebate items; to insert rebate items; to amend the Carbon Tax Act, 2019, so as to amend a rate of tax; to amend the Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2020, so as to provide for corrections; and to provide for matters connected therewith.

The 2021 Rates Bill proposes a general increase in the excise duty on alcohol and tobacco by 8 per cent, effective from 24 February 2021. National Treasury clarified that the policy guideline for excise burden is set at 40 per cent for tobacco, 11 per cent for wine, 23 per cent for beer and 36 per cent for spirits. It further acknowledged that the incidence has remained above the policy guideline in recent years; that a review on the excise policy framework for alcohol and tobacco will be conducted and inputs from all stakeholders will be considered thereafter. The Bill further proposes to differentiate excise duties by product type such that products comparable to cigarettes that are normally sold in packs of 10 or 20 sticks will be taxed accordingly, while other products will be taxed by weight.

3.Public Participation Process

The stakeholders submitted that, (1) the proposed 8 per cent increase on cigarettes is unjustifiable in the context of a projected inflation rate of only 4.9 per cent, (2) the increase is non-compliant as it will put the excise incidence on the cigarette’s Most Popular Price Category (MPPC) at 45 per cent, which is 5 percentage points higher than what National Treasury’s own excise policy stipulates, and (3) the increase is unsustainable and detrimental to the continued survival of the already distressed legal cigarette industry in South Africa. The stakeholders cautioned that more excise tax increases will decrease cigarette sales, increase illicit trade and decrease tax revenue.

3.1Summary of key issues raised on the 2021 Rates Bill

3.1.1The tobacco industry is already affected by the high existing tax incidence and the impact of the COVID-19 lockdown ban on cigarette sales. The University of Cape Town (UCT) and other studies showed that the illicit sector grew by 104 per cent during the lockdown period; that sales of Peter Stuyvesant, the most popular brand in the legal Duty Paid (DP) segment, plummeted by over 54 per cent and that National Treasury collected around 50 per cent less than its budgeted figure for cigarette tax of R14.46 billion during the 2020/21 financial year.

3.1.2Excise tax increase is unsustainable as it (1) did not take into consideration the impact of the five months’ cigarette ban, which extensively destabilised South Africa’s cigarette industry, (2) the state of the Duty Not Paid (DNP) market, which shows that the DNP markets now constitutes 64 per cent of the entire cigarette market, making South Africa’s DNP cigarette market share the largest globally, (3) change in the MPPC will constitute 85 per cent against an excise policy of 40 per cent and the total tax incidence on the revised MPPC is 99 per cent, which makes South Africa by far the leading country in the world in terms of total tax incidence on cigarettes and (4) based on the price and price elasticity of cigarettes in a COVID-19 context, raising prices will always result in higher taxes and lower consumption levels, also higher excise duties may not always result in higher government revenues.

3.1.3With regards to excise policy on cigarettes, in the past four years, cigarette excise has been aggressively set outside government’s own cigarette excise policy parameters of higher than 40 per cent excise incidence on the MPPC or forecast inflation. The stakeholder’s view is that this is clear disregard of the cigarette excise policy because it violates government’s commitment to fair administrative treatment of investors, as provided under the Protection of Investment Act and the Constitution. The stakeholders find it improper for government to openly ignore its own excise policy for four consecutive excise review periods.

3.1.4On the proposal to review the cigarette excise policy, it was submitted that recent market studies showed that at least two out of every three cigarettes sold in South Africa are DNP and are sold for as little as R6 per 20s pack against an average price of R42 per 20s pack for legal cigarettes. Against this background, it is clear that a review of the excise policy which will affect less than 36 per cent of the true market will do little in terms of meeting Government’s public health goal of reducing consumption, the stakeholder submitted.

3.1.5On other revenue generating measures on pipe tobacco products, the concern submitted is that contrary to the National Treasury’s position on this category, there is sufficient room to increase the price further, according to the toxicant continuum argument (pipe tobacco has an elevated toxicant profile compared to cigarettes), without impacting sales in a significant way. It was further argued that this favourable excise treatment of the pipe tobacco category amounts to unfair and discriminatory treatment of “like or similar” products, in violation of the national treatment principle, as enshrined in many treaties to which South Africa is party to. The stakeholders believe that this position poses a legal challenge for government in the future.

3.2Recommendations made by the stakeholders

3.2.1Government should adopt a more sensible approach to use excise policy to suppress the growth of the illicit market, by closing the gap between DNP and DP cigarette prices, through gradual excise increases typically in line with inflation.

3.2.2The proposed increases should be reconsidered, as they are not only in violation with National Treasury’s own policy but will also make the cost of legal cigarettes prohibitive to the average consumer.

3.2.3 The priority for government right now should be to ensure an effective customs and excise administration and enforcement system for the tobacco industry.

3.2.4 Government should consider immediate enforcement of the SARS Productions Counter Rules by all local manufacturers; end to end frequent and comprehensive audits of all manufacturers; stricter border control and enforcement; ratification of the World Health Organisation (WHO) Protocol and implementation of an independent track and trace system and implementation and full enforcement of a Minimum Retail Sales Price of R28 for 20 sticks.

3.2.5Excise on pipe tobacco under tariff item 104.35.02 and 104.35.03 in Schedule (Part 1) of the Customs and Excise Act, 1964 which currently sits at ZAR 250.22/kg, should be increased to at least 75 per cent of the excise rate of cigarette excise that is ZAR 880/kg.

4.Responses from the National Treasury on issues raised

On the 8 per cent excise increase on cigarettes, National Treasury explained that excise taxes on tobacco products are intended to reduce consumption and improve public health whilst generating revenue for government. As stated in the 2021 Budget Review, the WHO recommends an excise incidence of at least 70 per cent to effectively reduce consumption. An 8 per cent increase will shift the excise duty incidence to around 45 per cent, it further said.

With regards to the concern that the hike proposed in the Bill will put the excise incidence on the cigarette’s MPPC at 45 per cent, which is 12.5 per cent higher than what National Treasury’s own excise policy stipulates, the response was that although the proposed increases keep the tax incidence above the 40 per cent policy guideline, the industry has continued to absorb a portion of the excise increases as opposed to passing them through to consumers, which leads to an overestimated tax incidence. Also, the adjustments correct for any price movements that tend to undermine government’s policy intention to reduce consumption and improve public health. The excise increases also seek to ensure that tobacco products do not become affordable over time as this will increase consumption of tobacco products, which goes against public health policy objectives The targeted incidence of 40 per cent is a policy guideline and need not be followed by government every year. Given that the incidence has remained above the guideline in recent years, the 2021 Budget Review announced a review on the excise policy framework for tobacco.


National Treasury clarified that it uses Peter Stuyvesant as the anchor brand in the calculation of the MPPC, however, according to an Ipsos Market Analysis, the MPPC now sits at the low value for money segment, with the anchor brand retailing for R22.70. National Treasury said that it does not accept the issue raised because a revision of the MPPC to the proposed R22.70 will be a fundamental or substantive policy change with significant ramifications for tobacco control policy in South Africa. The current benchmarking using the MPPC already has differential impacts on cigarette products in terms of excise burdens, so National Treasury does not envisage a situation where there is a reversal on the current levels of excise duty rates. However, as announced in the 2021 Budget Review, the excise policy framework for tobacco products is currently under review and some of these issues will be considered and inputs from all stakeholders will also be considered.

SARS noted the comments about the illicit trade of tobacco and responded that the problem of illicit trade cannot be resolved through the excise rate adjustments but needs to be effectively addressed through robust compliance and law enforcement mechanisms. It was further reported that SARS has been working hard to rebuild internal capacity and has also, through the Inter Agency Working Group (IAWG) on Illicit Trade, been implementing compliance and enforcement measures. This is evident from a number of raids, seizures and destruction of illegal cigarettes conducted recently as profiled in the media.

The recommendations made were not accepted as it is possible for government to concurrently oversee the implementation of an effective customs and excise administration system while reviewing the existing excise policy framework. The two processes are not mutually exclusive and SARS is implementing a number of compliance measures, including collaborating with other law enforcement agencies and industry to address issues in the tobacco supply chain. Furthermore, the National Department of Health is leading government on the matter of ratifying the WHO's Protocol to Eliminate Illicit Trade in Tobacco Products.

It was further explained that the issue of Minimum Retail Sales Price is a new proposal in terms of the current policy regime, that the excise policy framework for tobacco products is currently under review and that inputs from all stakeholders such as this will be considered. Also, that government is aware of the studies conducted regarding the problem of illicit trade in alcoholic products, especially during the various periods of trade restrictions imposed by Regulations issued in terms of the Disaster Management Act, 2002.  Illicit trade is a concern for government, both in terms of undermining public health and harm reduction objectives, and fiscal collections. There are however efforts from both SARS and the law enforcement agencies to address the problem.

5.Observations and recommendations

5.1The Committee notes that the annual tax Bills have to be processed within stringent Money Bills Act timelines and that this year in particular, the Local Government elections and the further extension sought by the Minister of Finance extended the tabling of the Medium Term Budget Policy Statement to 11 November 2021 as opposed to the third week of October each year, thus putting more time pressures on the Committee than usual.  Under the challenging circumstances, due attention was given to the concerns of stakeholder’s and the way forward beyond this bill was also suggested. However, for effective processing of the tax bills, the Committee believes that the National Council of Provinces in consultation with the National Assembly needs to better restructure the parliamentary programme, as these bills get referred to the National Council of Provinces committees too late in the last quarter of the year, as indeed do the other Bills related to the Medium Term Budget Policy Statement. The Committee raised this repeatedly with both the House Chairperson for Committee, Oversight and Intergovernmental Relations (IGR) and the National Council of Provinces Chief Whip, and requested them to raise our concerns with their National Assembly counterparts, but there has been no progress. The Committee chairperson is mandated to raise it with them yet again.

5.2The Committee notes that taxes on alcohol and tobacco are guided by a policy framework that targets the excise duty burden and that National Treasury will review this policy framework during the 2021/22 financial year. The Committee further notes that the purpose of excise taxes on tobacco and alcoholic beverages is to reflect the harmful external costs related to excessive consumption and raise tax revenue. Also, that the World Health Organisation recognises the proposed measures as one of the most cost-effective policy approaches to reducing overall consumption and improving population health and has reported in a 2019 study that on a per person basis, South Africa’s cigarettes were more affordable in 2018 than in 2008.

5.3The Committee also notes the issues submitted by the stakeholders in the tobacco industry that the increase on tobacco prices is unsustainable; unjustifiable and above inflation; non-compliant with National Treasury’s own excise policy and detrimental to the continued survival of the already distressed legal tobacco industry in South Africa, perpetuated by the impact of the COVID-19 lockdowns. The Committee expresses its concerns about the job losses and the closing down of about 30 black farmers’ businesses and sympathises with the concerns raised. The Committee recommends that the South African Tobacco Transformation Alliance and Black Tobacco Farmers Association forward correspondence to National Treasury on their application for government funding because of losses through COVID-19 and National Treasury replies to this within a reasonable period and forwards a copy of their response to the Committee.

5.4The Committee repeats its previous concerns about the need to balance the concerns of the tobacco industry with the concerns about the adverse consequences of smoking. The Committee recommends that National Treasury discusses the concerns of the stakeholders in the tobacco industry before deciding on amendments in the tax Bills in ways that are consistent with the need to ensure the confidentiality on rates and monetary increases in the Rates Bill.

5.5While the Committee recognises some progress made, it reiterates that National Treasury, the South African Revenue Service and other relevant agencies should significantly increase their efforts in addressing the illicit tobacco trade, especially in view of its upsurge with the COVID-19 lockdown restrictions, the even greater health challenges that the illicit tobacco trade poses and decrease in tax revenue.

5.6The Committee calls for a greater degree of co-operation and interaction between the industry and South African Revenue Service to bring about better compliance for the benefit of all legitimate stakeholders as well as for the benefit of the fiscus and the country.


The Select Committee on Finance, having considered and examined the Rates and Monetary Amounts and Amendment of Revenue Laws Bill [B21 - 2021] (National Assembly – section 77), referred to it, and classified by the JTM as a Money Bill, accepts the Bill.


Democratic Alliance (DA), Economic Freedom Fighters (EFF) and Freedom Front + (FF+) reserve their position.


Report to be considered.


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